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Actuarial Perspectives on Accelerated Underwriting

Presented by the Life Underwriting and Risk Classification Work Group of the American Academy of Actuaries

NAIC Accelerated Underwriting (A) Working Group – June 18, 2020

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Presenters

Susan Bartholf, MAAA, FSAChair, Academy’s Life Underwriting and Risk Classification Work Group

Donna Megregian, MAAA, FSAMember, Academy’s Life Underwriting and Risk Classification Work Group

Mary Bahna-Nolan, MAAA, FSA, CERAMember, Academy’s Life Underwriting and Risk Classification Work Group

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American Academy of Actuaries

The American Academy of Actuaries is an 19,500-member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.

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Abbreviations Accelerated Underwriting (AUW) Actuarial Standard of Practice (ASOP) Underwriting (UW)

These and other relevant terms are listed in the Appendix.

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Agenda

Key Messages Evolution of UW Principles of Risk Classification Actuaries and Underwriters Actuaries’ Unique Perspective Summary of the Actuarial Perspective on AUW

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Key Messages

UW process continually changes, the fundamental principles of risk classification are unchanged.

Actuaries and underwriters together align risk classification with mortality expectations for each risk pool.

Actuaries provide unique perspective in the design and execution of underwriting programs.

Actuarial principles underlying AUW call for discipline in its development, implementation and maintenance, as with ANY UW program.

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The Evolution of UW

1890 – US Mortality Studies

1920 - Formation of UWProfession

1940 –1950s First computers;

Framingham study (1948)

1960 – Smoker Rates, US Surgeon General Smoking & Health

Report (1964); Formation of Academy

(1965)

1980s – HIV; Blood becomes

mainstream data source

Late 1980s/early 1990s -

Development of preferred classes

1990s -Automated UWof applications

2000s - Information age; Rx data available,

identity verification

2010+ –MVR study, NT

ProBNP, credit

1902 – MIB formed

2015+ - Predictive models, mortality

scoring

2020+ - Digital health data, wearables

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Principles of Risk ClassificationRisk classification is foundational in the underlying principles of insurance Purpose: align risk characteristics with an expected outcome

Group similar risks into risk pools Premium rates are equitable if the difference in rates reflects the difference in risk level

Risk alignment is demonstrated by statistical or other mathematical analysis of available data, may also use clinical experience and expert opinion

The process of risk classification involves gathering data to understand the risk Different paths, different data elements are gathered for individuals based on what is learned

during the process.

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The Actuary and Risk Classification

Risk Classification is reasonable when it is based on sound actuarial principles and related to actual or reasonably anticipated experience Actuaries are guided by ASOP #12 Risk Classification

AUW should follow the principles of risk classification Offers the potential to improve risk classification Impact on risk classification can be more easily measured, data and algorithms are more

consistent than individual human judgement that varies from person to person

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Underwriters and Actuaries In life insurance, underwriters and actuaries have different but interdependent roles related to risk classification Underwriters follow established risk classification principles that differentiate

fairly on the basis of sound actuarial principles and/or reasonable anticipated mortality experience. Underwriters are accountable for developing the UW process and classifying applicants into risk pools They assign risks to groups based on the benefit costs of the risk pool

Actuaries analyze changes to risk classification because of the impact to critical actuarial activities Develop mortality assumptions for each risk pool Reserve determination/Asset adequacy testing/risk management

Actuaries and underwriters work together to align risk classificationwith mortality expectations for each risk pool.

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Some questions actuaries consider related to AUW.It starts with understanding the goals of the AUW program.

Risk Classification • How does AUW fit into the broader UW process? • What impacts does the triage or eligibility for AUW process have on risk selection? • How does this change the opportunity for adverse selection?

Data• Is the data used relevant, credible, and of high quality?• Is the data used unfairly discriminatory? • Does it appropriately classify risks?• Does it comply with laws such as HIPAA, FCRA, Unfair Trade Practices?• How do traditional and new data elements work together?

Actuaries Provide Unique Perspective

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Predictive Models• What does the model do? • How effectively does it accomplish what it is supposed to do? • How to validate the model?• How are model results blended with traditional UW methods and data elements?

Actuarial Processes • What are the impacts of AUW on product pricing/reserve determination/asset adequacy/risk

management?• Is there new program and experience monitoring needed?• What changes are there to target market, distribution, and mix of business?

Actuaries Provide Unique Perspective cont.

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Data is gathered to understand the risk Result of triage is approval or request for additional data What’s new is that some lives could be approved faster

Application

AcceleratedUnderwriting

Decision

Eligible for AUW?

Qualified for Acceleration?

Full UWwith fluids /

paramed

Accelerated OfferNO fluids / paramed

Hold out

AUW Risk Classification Process

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Throughout the history of UW, new data sources and ways to use data have arisen

New data or data sources should be evaluated to assess their impact on risk classification. When new data is evaluated, it is evaluated for its protective value as an additional piece of data or

replacement for existing data element(s) Mortality studies and/or retrospective studies assess the value of data that are/can be used for UW

Changes to Risk Classification are evaluated and built into product design and pricing.

Regulation is in place that governs data used in UW. HIPAA FCRA Unfair Trade Practices Act

Data Used in UW Evolves

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Predictive Models

Use data and probabilities to forecast outcomes Models used for UW may predict relative mortality or risk class Models incorporate statistics to identify interdependencies among data

elements Built using historical data Validated using different historical data

Model results are typically used more to inform UW decisions than to make the UW decision.

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As with any UW change, AUW programs need to be monitored Differences between how the new UW paradigm is working compared to previous UW Changes to the pool of issued lives

Examples of tools used to monitor: Random holdouts

Requiring some lives eligible for acceleration follow the non-accelerated process Post-issue Attending Physician Statements

Assessing the accuracy of the acceleration process by evaluating UW decisions of issued policies against Attending Physician Statements

Monitoring key performance indicators Distributions by underwriting classes/smoker status Pass-through rates (percentage of applicants that go through the accelerated process)

Mortality and lapse experience studies

Monitoring AUW

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Some Key ASOPs Related to AUW

All ASOPs guide actuaries when performing professional services.Some ASOPs that may relate to AUW:

#12 Risk Classification #23 Data Quality #25 Credibility Procedures #54 Pricing of Life Insurance and Annuity Products #56 Modeling Setting Assumptions (currently being drafted)

The Actuarial Standards Board regularly adds and updates ASOPs.

ASOPs are developed by the Actuarial Standards Board and are binding on members of the U.S.-based actuarial organizations when rendering actuarial services in the U.S.

Actuaries are bound by a code of conduct. The purpose of this Code of Professional Conduct is to require Actuaries to adhere to the high standards of conduct, practice, and qualifications of the actuarial profession, thereby supporting the actuarial profession in fulfilling its responsibility to the public.

© 2020 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

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Summary of Actuarial Perspective on AUW

AUW is part of the on-going evolution of UW. As with any change in UW, the change needs to be tracked and monitored to

understand the full impact. Trade-off between mortality accuracy and evaluation time Changes to the time it takes for UW to wear off Different tools Process changes

There are existing regulations on data used in UW. Actuaries are involved in key aspects of Risk Classification and AUW

programs. Examples include working with underwriters, setting pricing assumptions, developing

reserves and model analysis ASOPs provide actuaries guidance, including considerations for AUW

© 2020 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

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Questions?

Ian TrepanierLife Policy AnalystAmerican Academy of ActuariesTrepanier@actuary.org

© 2020 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

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Appendix I: Relevant Terminology Accelerated Underwriting (AUW) - AUW is a process that is dynamic in

that non-medical and medical information gathering may be customized to the individual applicant. VM-20 Underwriting Definitions Sub-group

Actuarial Standards Board – sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice.

Actuarial Standard of Practice (ASOP) – describes the procedures an actuary should follow when performing actuarial services and identifies what the actuary should disclose when communicating the results of those services.

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Relevant Terminology, cont.

Automated underwriting - a technology solution which is designed to perform all or some of the screening functions traditionally completed by underwriters, and thus seeks to reduce the manpower, time and/or data necessary to underwrite a life insurance application.

Algorithm – a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer

Causation – the relationship between cause and effect; the action of causing something

Correlation - a mutual relationship or connection between two or more things

© 2020 American Academy of Actuaries. All rights reserved.May not be reproduced without express permission.

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Relevant Terminology, cont.

Predictive Modeling - a process that uses data mining and probability to forecast outcomes. Each model is made up of a number of predictors, which are variables that are likely to influence future results.

Underwriting (UW) – Process by which an insurer decides whether to issue insurance and on what terms and at what price. Life Insurance, K. Black, et.al, 14th edition, 2013

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Appendix II: Additional Resources

https://www.actuary.org/sites/default/files/files/publications/SI_AUW_LATFPresentation_12.8.2016.pdf

https://www.actuary.org/sites/default/files/files/publications/LATF_AUW_11.30.2017.pdf

http://www.actuarialstandardsboard.org/standards-of-practice/#filter=.Life

https://www.soa.org/globalassets/assets/files/resources/research-report/2019/accelerated-underwriting-survey.pdf

https://www.soa.org/globalassets/assets/files/research/exp-study/predictive-analytics-underwriting-report.pdf